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EUR/USD update (7th Aug 2012, 06:00)

In US trade, the euro continued to edge higher on investor hope that Spain would request a full-blown EU/IMF bailout, clearing the way for the ECB to buy Spanish bonds in the secondary market.

While most believe that a Spanish request for EU aid is all but inevitable, there is no indication that such a request is imminent, with the Spanish government maintaining that it needs to see the details of the assistance programme both from the EFSF and the ECB before making a formal request.

Also chiming in, Italy's Prime Minister Mario Monti urged the ECB to address bond market strains, saying that the problem needed to be ’solved quickly now so that there's no further uncertainty about the eurozone's ability to overcome the crisis‘. Spain's Prime Minister Mariano Rajoy echoed similar comments when he stressed that the eurozone ’cannot accept‘ the current wide differences in financing between one member state and another. The pressure is now undoubtedly on the ECB to act, and act soon, with the market likely to grow increasingly restless and frustrated if a suitable policy response is not revealed in the coming weeks.

For the time being, the ECB is being given the benefit of the doubt, with the euro’s recent strength predominantly attributable to short covering. Having ended yesterday’s Australian session around the 1.2385 level, the euro pushed up to close US trade at 1.2401. Upon resuming for Asian trade, the euro has drifted fractionally to be currently in mid-1.2390s.